DLC Econ 101: DLC and Diminishing Marginal Utility

With Nintendo adding DLC to the newest Smash Brothers game, I wanted to take some time and look at the economics behind this. This is the first in a series of article to explore DLC for Smash Bros and how economic theories affect the company’s decisions.

With DLC in Smash, a deep-seated dream of an ever expanding roster may now be realized, and fans will be clamoring for every character under the sun. It may seem like Sakurai could make millions of characters, and fans are so feverish that Nintendo could profit from these millions of characters. Regardless of what we may believe, Sakurai will be limited on the number of characters he can make. On one hand, there just isn’t enough time in the day to make that number of characters. Even still, if Sakurai could fulfill every hope and dream, the greatest limiting factor to making characters is the Law of Diminishing Marginal Utility

What then, is the Law of Diminishing Utility? Investopedia defines it as “A law of economics stating that as a person increases consumption of a product – while keeping consumption of other products constant – there is a decline in the marginal utility that person derives from consuming each additional unit of that product.” In other words, the more you consume, the less you like it the second time. The best example is food. Say you are eating Ice Cream. Like any self respecting human, you love ice cream. The first one you have really satisfies you, which we refer to as “utility.” You like it so much, you have another. This time, you didn’t like it as much, but it’s still good. So you have another, and another. As you keep eating ice cream, you don’t like it as much. Eventually, it makes you sick, which we refer to as negative utility.

So how does this relate to DLC? Naturally, with each DLC character that is added, marginal utility (the satisfaction from each additional unit) declines. That is, we get less and less enjoyment for each new addition, and, from Nintendo’s standpoint, spend less and less money. Even though fans were excited for Lucas’s inclusion, it may not have been as exciting as Mewtwo’s inclusion. The benefit we derive from DLC declines as more content is added. If Nintendo abuses DLC, consumers could reach a point of “negative utility,” where we resent the DLC and even become hostile towards it.

So the questions remains, how much DLC does Nintendo make? Marginal Utility is hard to estimate. It is almost impossible to quantify because marginal utility is unique from person to person. This is where the ballot comes in. The ballot is actually a sneaky way to get consumers to willingly give Nintendo this information. The more unique responses Nintendo gets from the ballot, the more DLC they can produce. If Nintendo gets a significant amount of responses, this means consumers are warm to DLC and marginal utility, that is, the utility for each additional character, is low. Each additional character Nintendo adds diminishes utility no matter what. Since fans tell Nintendo exactly who they want, they can determine which characters to focus their limited resources on.

Even with this data, it may be hard to determine when Nintendo should stop or keep going. As I mentioned in my predictions, I expect Nintendo will do at least 4 additional characters. Based on reactions from fans to Lucas and Mewtwo, it seems that fans are very open to DLC characters and marginal utility will decline at a slower rate. In the end, we’ll have to wait and see how much additional content Nintendo will make and how much fans are willing to purchase it. In the end, there are multiple reasons why Nintendo will or wont produce DLC characters. Economics is still a good start.

Please leave any comments or questions in the comments. I will be doing more on DLC in the near future.